Canada's inability to move its oil beyond North American markets cost oil producers an estimated $24-billion in 2012, and deprived federal and provincial governments of $8-billion in royalties and corporate tax revenue. The price discount on all Western Canadian oil versus international benchmarks has emerged from rising production and stagnant demand in North America, which has produced a glut of oil in the interior of the continent.
The economic loss is felt by more than just the oil-producing provinces. All provinces share in the loss that has affected the industry in recent years. And all provinces stand to benefit from current and future development in the oil sands.
There is a lot of discussion of the provinces outside of Alberta getting their "fair share" of the benefits associated with oil sands development. This discussion is misplaced. Oil sands operations and development already generate significant employment and fiscal benefits outside of Alberta. If the transportation bottleneck – due to insufficient pipeline capacity – can be overcome, these benefits are expected to grow.
The Conference Board of Canada's 2012 report, Fuel for Thought: The Economic Benefits of Oil Sands Investment for Canada's Regions, outlined the economic benefits associated with oil sands development over the next 25 years. Subsequent research quantified the benefits associated with oil sands operations. Combined, the industry employs an estimated 420,000 people in Canada today, equivalent to 2.4 per cent of total employment. (See Chart.) Using our forecasts for production and investment in the oil sands, we expect employment to rise to more than 700,000 by 2030.
About 30 per cent of these jobs are found in provinces other than Alberta. Ontario is the largest beneficiary, accounting for 15 per cent of the national employment effects, but all of the provinces experience some benefits. Whether it is financial services in Ontario, engineering firms in British Columbia, or steel mills in Saskatchewan, the supply-chain linkages to the oil sands already spread across the country.
Beyond these supply-chain links, other benefits accrue to the provinces. At any given time, thousands of out-of-province workers in Alberta are earning wages that they will bring back in large measure to their home provinces. As well, when the direct, indirect and induced impacts are included, oil sands development and operations support billions of dollars of federal tax revenues, which are in turn redistributed to the other provinces through program spending and transfers, such as equalization payments.
Some have argued that the benefits of oil sands development have been reduced by their impact on the rising value of the Canadian dollar, which has subsequently reduced the competitiveness of Canada's manufacturers – so-called "Dutch disease." There are two flaws with this argument.
Although there has been an easily observed link between the dollar and energy prices, this link cannot be fully attributed to the oil sands. Even with the rapid increases in production in recent years, oil sands still account for only about 60 per cent of Canadian oil production. And in 2012, the Bank of Canada indicated that only half of the increase in the value of the Canadian dollar could be attributed to higher commodity prices, and oil only accounts for about half of the weighting in the Bank of Canada's commodity price index. Thus, only 15 per cent of the increase in the value of the dollar can be attributed to oil sands.
In addition, factors other than the strong dollar – such as China – are driving the weakness in Canadian manufacturing, as we discuss in Walking the Silk Road: Understanding Canada's Changing Trade Patterns. Former Bank of Canada governor Mark Carney suggested that only 20 per cent of the weakness in manufacturing exports can be attributed to the strong dollar. This implies that the oil sands account for only about 3 per cent of what has happened with Canada's manufacturing sector; hardly a compelling case.
The economic benefits of the oil sands outside of Alberta are significant, and resistance to the development of oil transportation infrastructure is reducing current and potential future gains. Meanwhile, the costs related to Dutch disease are much smaller than often portrayed. The provinces are rightly concerned about mitigating the potential fiscal costs of spills from new infrastructure, but this can be done through regulatory and operational measures.
In short, we need to make sure that we are properly assessing all of the benefits and the costs of the oil sands when determining what is "fair."
Michael Burt is director of industrial economic trends at the Conference Board of Canada.